EU proposes agency to salvage or shut troubled banks

The European Commission today proposed creating an agency to salvage or shut failed banks, but the absence of an immediate backstop fund to pay for a clean-up means it may struggle to do its job.

Working in tandem with the European Central Bank as supervisor, the new authority is supposed to wind down or revamp banks in trouble. It constitutes the second pillar of a 'banking union' meant to galvanise the euro zone's response to the crisis.

If agreed on by European Union states, the agency will be set up in 2015 and will eventually have the means to impose losses on creditors of a stricken bank, according to the blueprint. But the new authority will be handicapped by the fact that it will have to wait years before it has a fund to pay for the costs of any bank wind-up it orders.

In practice, this means it could be very difficult to demand any such closure. Officials say the plan foresees tapping banks to build a war chest of 55 billion to €70 billion but that is expected to take a decade, leaving the agency largely dependent on national schemes in the meantime.

“We have also seen how the collapse of a major cross-border bank can lead to a complex and confusing situation,” said Michel Barnier, the commissioner in charge of regulation. “We need a system which can deliver decisions quickly and efficiently, avoiding doubts on the impact on public finances, and with rules that create certainty in the market.”

The commission will also not, however, call for giving a backstop role to the euro zone’s rescue fund, the European Stability Mechanism. The lack of initial funds or recourse to the ESM undermines a central goal of banking union - to sever the ‘doom loop’ that forms as banks buy ever more government bonds from their home states.

Any suggestion of putting such a safety net in place faced stiff resistance from Germany, which feared that it could be left on the hook for problems uncovered elsewhere, when the ECB starts policing the sector next year.

Furthermore, the ‘resolution board’ that executes bank wind-downs will be forbidden from imposing decisions on countries, such as demanding the closure of a bank, if that would result in a bill for that nation’s taxpayer. Analysts were critical.

“The key problem is that without the ultimate access to fiscal resources, it will be very difficult to agree to shut down a bank,” said Guntram Wolff of Bruegel, a Brussels think tank.

The reform will be presented as the second pillar of a banking union, a scheme designed to underpin confidence in the euro zone and end the previously chaotic handling of cross-border bank collapses such as Dexia.

The original commitment, made at the height of the currency bloc's crisis, was to prevent heavily indebted countries from having to contain problems at their banks alone, such as those that nearly bankrupted Ireland.

But last year’s pledge by the European Central Bank to take whatever steps needed to back the single currency has calmed investor nerves, taking the pressure off countries to follow through.

As it is proposed, the new board would have authority over all 6,000 banks in the euro zone. If a bank were to run into trouble, the ECB would inform this executive board, which could then vote on whether to close or salvage the bank.

The board would have representatives from the European Central Bank, the European Commission, the home country of the bank under review and from states where it has branches. The commission hopes that this group, which will vary according to the bank, will plan for any emergency, leaving little to decide at short notice should a lender face collapse.

Reuters